Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Key Reasons To Start Tax Planning Early This Financial Year - Outside View by PersonalFN

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Key Reasons To Start Tax Planning Early This Financial Year
Apr 17, 2019

After the announcement of the interim budget Mr Piyush Goyal presented, many people were elated about the proposed tax reforms; particularly the full tax rebate for individual taxpayers with taxable annual income of up to Rs 5 lakh.

[Read: Has The Interim Budget 2019 Left You Smiling And Happy?]

The new reforms will help you save more, and this can be invested in your long-term financial wellbeing.

But you can enjoy the benefits if tax planning is done at the beginning of the financial year. If you procrastinate till the last minute, you will make ad hoc investments which will be merely a tax saving exercise.

In the month of February, Anand had received a text from the Income Tax department to file his ITR before the last date. If he didn't, he would have had to pay higher taxes. So, he began his search to choose an investment product to get a tax exemption, but he was indecisive.

Meanwhile, an insurance agent called him with a pitch for an endowment scheme that had a money-back benefit with additional bonus and a reversionary bonus.

Since he wanted to pay lower taxes, he didn't bother asking relevant questions nor calculating the actual returns that he would get back after the policy term ends. He invested in that endowment plan to save tax for that year. Two years later he realised the blunder he had done.

For an endowment policy term of 20 years, Anand was paying a monthly premium of Rs 2,000. He compared the returns he would get with Equity Linked Savings Scheme (ELSS) for a period of 2 years and 20 years.

Table 1: Insurance returns v/s ELSS returns

Investment tenure 2 years 20 years
Monthly investment (Rs) 2,000 2,000
Endowment plan returns at 5% (Rs) 50,582 825,493
ELSS returns at 10% (Rs) 53,335 1,531,394
Difference in returns (Rs) 2,753 705,901
(Illustrative purpose only. The rates are assumed)

The only way he could correct his mistake is to book losses for the first two years and then for the remaining tenure of 18 years invest in ELSS, to earn Rs 385,643 more than what he would get if he held onto his endowment policy.

Table 2: ELSS returns after booking losses

Investment tenure 20 years 18 years
Monthly investment (Rs) 2,000 2,000
Endowment plan returns at 5% (Rs) 825,493
ELSS returns at 10% (Rs) 1,531,394 1,211,136
Difference in returns (Rs) 705,901 385,643
(Illustrative purpose only. The rates are assumed)

[Read: Why Endowment Plans are Useless: A Case Study]

I have come across several people like Anand, who take action at the nth hour. They do not evaluate and understand the actual returns against their cash outflow, because they are just fixated on the thought of tax saving before the deadline of the fiscal year-end.

So, how can you prevent yourself from repeating such a mistake?

Engage in tax planning from the beginning of the year!

Tax planning is a broader concept that involves a comprehensive investing exercise to ensure tax efficiency. Tax efficiency is achieved by accounting one's larger financial plan with respect to an individual's age, financial goals, ability to take risk and investment horizon (including nearness to financial goals).

By adopting the approach of tax planning, you not only ensure long-term wealth creation, but protect your capital.

Hence, please remember to commence your tax planning exercise as soon as the fiscal year begins complementing it with your overall investment planning exercise.

What happens if you do tax planning at the beginning of the year?

  • Reason 1: Power compounding works for you

    Tax planning takes into consideration the age factor and investment time horizon.

    Consider three friends Suresh (25), Mahesh (30) and Rajesh (35) investing for their retirement at their respective ages.

    Table 3: Amount 3 friends will receive at retirement

    Particulars Suresh Mahesh Rajesh
    Present age (years) 25 30 35
    Retirement age (years) 60 60 60
    Investment tenure (years) 35 30 25
    Monthly investment (Rs) 7,000 7,000 7,000
    Assumed returns per annum 10% 10% 10%
    Sum accumulated (Rs) 2,67,97,937 1,59,55,277 93,65,232
    (For illustration purpose only)

    From the table above, it is evident that Suresh who starts investing early in an ELSS /Tax saving mutual fund will get Rs 2.67 crore at an assumed rate of return of 10% when he retires. This amount is the biggest than the amounts which Mahesh or Rajesh will receive.

    Suresh has many years to retire. Hence with the power of compounding, his corpus will be larger.

    So be the early bird who catches a bigger worm!

  • Reason 2: Have time to choose investment products appropriately

    You have time to choose the right mix of investment products that are suitable for your financial plan and avail maximum tax savings. There are several investment avenues that offer tax exemptions under Section 80 that not only provide deductions but can boost your tax savings too.

    Table 4: Snapshot of deduction

    Section Quick Description of Deduction Deduction limit
    80C* Key investment instruments eligible for deduction under this Section include - Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), EPF(Employee Provident Fund), NSC (National Saving Certificate), Senior Citizen Savings Scheme (SCSS), 5-year tax saving bank fixed deposits, 5-year Post Office Time Deposit (POTD) , premium paid for life insurance plans, housing loan principal repayment, etc. A maximum of Rs 1.50 lakh p.a.
    80CCC* Contribution to Pension Fund of Life Insurance Corporation or any other insurer referred in section 10(23AAB). A maximum of Rs 1.50 lakh p.a.
    80CCD* Contribution to Pension Scheme (National Pension Scheme) notified by Central Government. Rs 1.50 lakh p.a. + vide sub-section 1B an additional deduction of up to Rs.50,000 is allowed for contribution towards NPS by the employee. If the employer has contributed to the NPS on behalf of the employer, under Section 80CCD (2) the deduction eligible is: 10% of the salary of an individual.
    80CCG The investment made in Rajiv Gandhi Equity Savings Scheme (RGESS) 50% of the amount invested
    80D Premium paid for medical insurance Maximum up to Rs 25,000 for non-senior citizens and Rs 30,000 in case of a senior citizen.
    80DD Maintenance including medical treatment of a handicapped dependent who is a person with a disability Rs 75,000, irrespective of the amount incurred or deposited. However, in case of disability of more than 80% a higher deduction of flat Rs 1.25 lakh shall be allowed.
    80DDB Expenditure incurred in respect of medical treatment Actual incurred, with a ceiling of up to Rs 40,000 or Rs 60,000 in case of a senior citizen, whichever is lower. But for those with age 80 and above, classified as very senior citizens, the eligible deduction is Rs 80,000
    80E Repayment of loan taken for pursuing higher education The maximum deduction for interest paid for a maximum of 8 years or till such interest is paid, whichever is earlier
    80G Donations to certain funds and charitable institutions Maximum deductions allowed can be 50% or 100% of the donation, subject to the stated limits as provided under this section
    80GG Rent paid in respect of property occupied for residential use Maximum deduction allowed is least of the following: Rs 2,000 per month; 25% of total income; Excess of rent paid over 10% of total income
    80GGA Certain donations for scientific research or rural development
    80GGC The contribution made to any political parties or an electoral trust Amount donated to a political party is fully exempt
    80TTA Deduction in respect of interest earned on savings bank deposits A maximum of Rs 10,000 or actual interest, whichever is lower
    80U A person suffering from a specified disability(s) Rs 75,000, irrespective of the amount incurred or deposited. However, in case of disability of more than 80% a higher deduction of flat Rs 1.25 lakh is allowed.
    *The deduction limit is up to Rs.1.5 lakh aggregated across section 80C , 80CCC, 80CCD(1)
    (Source: Personal FN Research)

    While planning for your taxes, you can consider investing in various avenues as per your risk profile and will increase your tax savings. Basically, you will save more and pay less.

    [Read: 5 Tax-Saving Investment Avenues For Conservative Investors]

  • Reason 3: Optimally use your allowances

    You get an opportunity to avail of several salary allowances that can benefit you. Every year the tax rules change, so when you file your returns early, you may get ideas on how you can save tax better for the current financial year. Taking note of these allowances and the impact on your tax outflows will help you optimise your financial budget.

  • Reason 4: Can control your tax outgo

    If you are a salaried professional, most companies deduct tax in the last quarter of the year. After accounting for all deductions, if the tax is payable, this will be deducted from your salary. Therefore, it is important to work out the tax payable in advance, after availing of all the eligible tax rebates. If there is a high tax outgo, ask your employer to deduct the tax on a monthly basis from your salary.

  • Reason 5: Be aware of your monthly investment requirements

    When planning your taxes, you can calculate the monthly investment needed. This will avoid a huge lump sum outflow at the end of the financial year. Especially, when investing in a tax-saving mutual fund, it is pertinent that you invest in a staggered manner as opposed to a one-time investment. Besides, you can earn higher returns.

In conclusion...

There is no time like the beginning of the year to plan for your tax savings. Last minute tax planning can lead to lower savings and bad investments. It is important for you to know the various routes to save tax on your income. You need to check if you are on the right track towards saving on taxes and take timely action in case you have missed any benefits.

If you are looking at the ways you can save your hard earned money from the tax-man legally, and reduce the tax burden efficiently, PersonalFN's Comprehensive Guide to Tax Planning (2019 Edition)may be of help. This Comprehensive Guide to Tax Planning is absolutely FREE.

Editor's note: If you aren't sure about which mutual funds to invest in for your tax saving needs or for SIP, don't worry! PersonalFN is offering three of its premium reports at the price of one.

These research reports will guide you to select worthy mutual fund schemes to SIP, the ones that have the potential to provide BIG gains, and the ones for your tax planning this year. Click here for PersonalFN's recommendation and subscribe now.

Author: Aditi Murkute

This article first appeared on PersonalFN here

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Key Reasons To Start Tax Planning Early This Financial Year". Click here!


More Views on News

Another Step from The Capital Market Regulator To Safeguard The Interest of Mutual Fund Investors (Outside View)

Aug 20, 2019

PersonalFN explains how The Capital Market Regulator has tightened its grip on mutual funds over the years.

Why I Broke My Own Allocation Rule for this South India Based Smallcap Company... (Profit Hunter)

Aug 20, 2019

You won't read or hear about this smallcap company that could be next Page Industries in the newspapers or financial channels. Here's how you can act on this opportunity.

The Government Relief Package I Would Like to Ask For (The 5 Minute Wrapup)

Aug 20, 2019

The relief package that could boost my neighbour's dry fruit sales, auto volumes, exports and stock markets alike.

Will the Rupee Continue to Fall? podcast (Views On News)

Aug 19, 2019

Will there be a rebound in rupee? What are things holding it back? And how does it affect you?

SBI Equity Hybrid Fund - Focusing On Growth With Stability (Outside View)

Aug 19, 2019

PersonalFN's brief analysis on the features and performance of SBI Equity Hybrid Fund.

More Views on News

Most Popular

The Perfect Stock in the Rebirth of India (The 5 Minute Wrapup)

Aug 8, 2019

This debt-free, well-managed company is all set to soar.

This 60-Year Old Smallcap Company Could Be Our Next Recommendation (The 5 Minute Wrapup)

Aug 12, 2019

My experience at the recent AGM of this smallcap company which has financials of any FMCG major.

Super investor Pulak Prasad is Buying Stocks Big Time...and You Should Too (The 5 Minute Wrapup)

Aug 9, 2019

Here's why the relentless correction in the Indian stock markets has not unnerved the big investors.

Smallcaps that Will Outperform in the Market Rebound (Profit Hunter)

Aug 12, 2019

Only These Smallcaps Will Give Historic Returns in the Future.

Qatar is Rearing Cows...this is Good News for India

Aug 9, 2019

Qatar has turned around after the Saudi embargo. This is good news for India.


Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Aug 21, 2019 11:17 AM